Don't just focus on commissions. Pay attention to all the fees and charges your broker makes you pay, and then find the one that costs you the least.
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If you want to be a successful investor, you'll need to have a brokerage account. But that doesn't mean you should pay more than you have to for the services you need. Picking the right broker can save you thousands of dollars compared to the highest-cost brokers out there, letting you boost the amount you'll have in your nest egg for retirement or other long-term needs.
In order to compare brokerage accounts on the basis of cost, you can't just focus on the most obvious fees you'll pay. Instead, it's smart to consider all of the money that you might need to spend on your brokerage account. That way you'll be able to do an apples-to-apples comparison that takes everything into account -- and lets you make the smartest decision available.
The mistake many people make with brokerage account costs
The headline number that people generally pay the most attention to when it comes to brokers is how much they charge on stock commissions. Many online brokers offer quite reasonable commissions, letting you buy stocks for $10 or less. Some even give you free access to certain types of investments, such as a select group of exchange traded funds or mutual funds.
The problem with comparing brokerage costs solely on the basis of commissions is that for many investors, the amount that you'll spend on commissions is only a small fraction of your total costs. If you go with a brokerage account that has rock-bottom commissions but relatively high levels of other types of fees and charges, then you could end up paying more than you would with a broker that charged higher commissions but lower fees.
All the fees you might have to pay on a brokerage account
Instead of focusing in on one particular type of charge, a smart cost analysis will take into account every potential fee that a broker could make you pay. The list below includes many of the charges you need to watch out for:
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Annual fees. Some brokers charge fees on a yearly basis just to have an account. Regardless of whether you make any transactions, you'll still owe this fee.
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Inactivity fees. In some cases, if you don't make any purchases or sales in your account during a given month, your broker will charge an extra fee.
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Commissions for investments other than stocks. In addition to a set commission for stock trades, brokers often charge different commissions for trades involving bonds, mutual funds, options, futures, and other financial instruments.
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Research fees. If your broker provides you with research tools, then you might have to pay for the privilege.
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Retirement account fees. Some providers charge extra fees for brokerage accounts that are held as IRAs. This fee is sometimes called a custodial fee.
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Expense ratios and sales loads. If you invest in mutual funds or exchange-traded funds, then the funds themselves typically charge investors for their expenses through an expense ratio. It's expressed as a percentage of the fund's total assets. Sales loads, meanwhile, are imposed on mutual funds and involve taking a percentage off the top of your investment to go to the brokerage professional who sold you the fund.
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Management fees. Some brokers charge a percentage of your assets in exchange for managing your account. Depending on the size of the account, a percentage-based charge can be a lot more expensive than the commissions you'd pay.